How to Legally Avoid Taxes on Your Social Security Benefits

[SeaBreeze]

I'm not receiving social security benefits yet, but here's an article about how to legally avoid paying taxes on them. Any thoughts on this? More here.

Making your income nontaxable

For most retirees, the biggest source of taxable income is a retirement savings account, often a traditional IRA or 401(k). The easiest way to convert such income to a nontaxable form is to move it into a Roth account. Roth IRAs are essentially the opposite of traditional IRAs: You don't get a tax break on your contributions, but the money you take out of the account is tax-free. That makes them perfect for retirees looking to reduce their income taxes.


If your retirement date is still a decade or more away, then now is a great time to open up a Roth IRA and start contributing to it. Usually, the best arrangement is to split your contributions between a traditional IRA or 401(k) and a Roth account. That way, you still get a tax break immediately, yet you're also giving yourself some tax-free income in the future. Workers who are fairly close to retirement and are only just opening a Roth IRA will probably want to maximize their Roth contributions to ensure they have a fairly high balance in the account by the time they retire.


On the other hand, if your income is much higher now than you expect it to be after you retire, your best bet is to maximize your contributions to a traditional IRA or 401(k), as that will result in a higher overall tax break. After you retire, you can still move those funds to a Roth account so that they'll produce nontaxable income -- more on that below.
What if I'm already retired?

A retiree or someone close to retirement can still benefit from a Roth account's tax-free income by performing a Roth conversion. That simply means taking money from your traditional IRA or 401(k) and dumping it into a Roth account.

A Roth conversion is a good move if all, or nearly all, of your retirement savings are in a traditional IRA or 401(k), as it would be difficult or impossible to avoid taxes on your Social Security benefits in that scenario. The only problem with a Roth conversion is that you have to pay taxes on the amount you convert, in the year you convert it. That can end up being quite expensive if you have a lot of money to move over. For example, converting $300,000 from your traditional IRA to a Roth IRA all at once would add $82,070.25 to your tax bill for the year (using the 2018 tax brackets for single filers) -- or potentially even more, if you have enough income from other sources to bump you to the top tax bracket.


Instead, it's best to spread a large conversion out over several years to minimize the tax impact, preferably starting a few years before you retire. If you spread your $300,000 conversion out over 10 years, for example, it would cost you just $7,500 per year in extra taxes (assuming you're in the 25% tax bracket after adding the converted funds to your income).

If you're already retired at that point, you'll end up paying taxes on your Social Security benefits during those years (which is another reason why it's best to start converting before you retire), but once the conversion is complete, you'll have gotten rid of those taxes for good.

 

[mathjak107]

doing roths early in your career are a no brainier as our career over decades usually sees our pay ramp up over decades . unless you start out in the highest brackets odds are your career average tax bracket will be lower than your retirement bracket . so roths early on can be worth doing .

conversions are a mixed bag . generally it is only worth converting if you have room left in the 15% bracket .

the other factor is your amount and plan for taking ss .

don't forget the tax gods give us a gift . if we are delaying social security and are living off cash , roth income and the zero capital gains brackets ,just using the standard deduction we can take 22k out of our taxable ira's at no tax and 40k at 4.50% . in 8 years of delaying ss you can get 320k out with very little in tax .why would we ever want to convert that and pay 15% ??????

so as you see the question as to converting is pretty complex . usually short answers to complex questions are wrong answers .

 

[OneEyedDiva]

doing roths early in your career are a no brainier as our career over decades usually sees our pay ramp up over decades . unless you start out in the highest brackets odds are your career average tax bracket will be lower than your retirement bracket . so roths early on can be worth doing .

conversions are a mixed bag . generally it is only worth converting if you have room left in the 15% bracket .

the other factor is your amount and plan for taking ss .

don't forget the tax gods give us a gift . if we are delaying social security and are living off cash , roth income and the zero capital gains brackets ,just using the standard deduction we can take 22k out of our taxable ira's at no tax and 40k at 4.50% . in 8 years of delaying ss you can get 320k out with very little in tax .why would we ever want to convert that and pay 15% ??????

so as you see the question as to converting is pretty complex . usually short answers to complex questions are wrong answers .

I'm in a lower tax bracket but I'm glad I converted to Roths when I did. They make up 67% of my investments and the traditional IRA only 11%. I like not having to take out large amounts for my RMDs just because the government says I have to. I also like that if I decide I don't want to pay taxes on a (non-IRA) distribution or too much of a distribution, I can take from my Roths or a portion from my Roths. If the rule stands, my RMDs will be sent directly to my charity of choice to avoid paying taxes on those distributions.

Seabreeze Having a Roth has not stopped my SS from being taxed.

 

[mathjak107]

roths work well where they can . but they are not for everyone .

take my son for example , he graduated law school and his first job right out of school pays more than i ended my career with . so he already is in the top brackets since he is an attorney and his wife a cpa . a roth will not benefit them at this point . it is doubtful it will add much value too by retirement because they are already top tier earners .

me on the other hand would have benefited very well from them . but who knew all the things linked to retirement income back then ? not me . any conversions i do will not pay , they will be in the next tax bracket from where we are accomplishing little . ss will always be taxed at our level of income so it is not a factor . all i care about is where our medicare premiums are and the brackets for our rmd's and right now none will benefit from a roth conversion .

 

[KingsX]

.

Social Security is only taxed if one's annual income [including half of your SS benefits] is over a certain amount.
I can easily live comfortably under that annual amount [for a single person the amount is $25,000.]

Not only is my SS not taxed, I'm able to withdraw from my taxable IRA tax free if I also stay under the IRS tax threshold,
which in 2018 will be $13,600 [single over age 65] and I don't even have to file a tax return.

Of course... all this refers to federal taxes... Texas has no state income tax.

Life is good.